The critical determinants of Rwanda’s saving model

As pointed out in recent article our savings rate (-1%-3% of our GDP for the last 5 years) is a disaster, if Africa’s savings rates (of 18% of GDP) is tragic. These rates are amplified by the fact that, (according to available statistics) only 8% of our population have some form of savings.

As pointed out in recent article our savings rate (-1%-3% of our GDP for the last 5 years) is a disaster, if Africa’s savings rates (of 18% of GDP) is tragic. These rates are amplified by the fact that, (according to available statistics) only 8% of our population have some form of savings.

Factor this into the that fact that, less than 20% of our population keep bank accounts, perplexes even an elementary student of economics as to the hurdles we need to overcome if we are to develop as a nation which must invest at least 25% of her GDP for us to keep course.

This is only possible, if our savings rate is above 23% of our GDP, otherwise our growth fundamentals remain in a state of uncertainty.

However, one of the fundamental determinants of savings of any nation is her rate of economic growth. Savings cannot precede growth, but on the contrary, they follow growth.

This assertion is premised on the fact that, savings are residual income not expended, underpinning the fact that, there has to be growth from which incomes generated can be appropriated, relative to the propensities to consume and save – into consumption and savings respectively.

Available research indicates that, the rate of growth can influence savings in two ways. First, savings and growth have been correlated over long-term horizon for many regions over different stages of their development.

Second, savings are directly related to output through investment, which, through the virtuous cycle of high savings-high investments and again high output, gives rise to high savings.

Theoretical underpins of the link between growth and savings have their origins in the Modigliani’s life cycle hypothesis.

According to this hypothesis, growth increases the savings because it does increase the incomes of the young relative to that of the elderly.

The positive influence of growth on savings has played a central role in the successful development of East Asian economies, is now an established theoretical framework for development economists.

According this view, East Asia’s unprecedented accumulation trajectory (frequently described as a virtuous cycle), is a mutual causation process where rapid growth raises savings rates which feed back into faster growth by financing more capital accumulation.

This view seems to have attracted the support of the World Bank (1993 Report), which emphasized that, in these countries, there has been a “virtuous circle” going from higher growth, to higher savings, to even higher growth.

Low savings rates in Africa, and indeed in Rwanda can then be characterised by a vicious cycle, that is a poverty trap in which low incomes and low savings reinforce each other.

Lahiri (1989:250) in his research points out that “… just as savings leads capital accumulation and hence growth, growth leads to savings by making the young savers more affluent than the older dissevers.”

In a research conducted by Hadjimicheal et al. (1995), it was found out that, savings were positively correlated with the level and growth of GDP, which is true given that, the same macroeconomic policies that affect the rate of growth, does affect the rate of savings directly.

Given the causal relationship between the rate of growth (GDP) and of savings and by extension investments, one would expect our savings to have grown exponentially with our GDP growth (which reached a record 11.2% last year).

Recent statistics indicate that our GDP per capita has increased from US $ 300 to close to US $ 500. Also reports from the financial sector indicate that, up to 50% of our money supply does not find its way into the mainstream financial institutions, means that, we have substantial savings among our people that are yet to be pooled together.

Existing strategies should be able to reverse this trend if only the political will I highlighted in the previous article comes to bear.

A research into reasons why our people prefer to keep their savings in non-monetized forms would inform our policy markers as to which policy options would effectively reverse this trend.

Ends

 

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